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International Journal of Finance & Economics

Impact factor: 0.784 5-Year impact factor: 0.776 Print ISSN: 1076-9307 Online ISSN: 1099-1158 Publisher: Wiley Blackwell (John Wiley & Sons)

Subject: Business, Finance

Most recent papers:

  • Debt spikes, blind spots, and financial stress.
    Laura Jaramillo, Carlos Mulas‐Granados, Joao Tovar Jalles.
    International Journal of Finance & Economics. October 18, 2017
    Are blind spots of public debt spikes sizable? And how do they affect financial stress indicators? This paper tackles these questions empirically, using information from 179 episodes of public debt spikes between 1945 and 2014. We find that large public debt spikes are neither driven by high primary deficits nor by output declines but instead by stock‐flow adjustments. These blind spots in debt dynamics are sizable in both advanced economies and emerging markets and could amount to more than 20% of gross domestic product in the median episode. These public debt spikes increase financial stress indicators significantly, in particular when a large share of public debt is held by domestic commercial banks. Enhanced transparency and better debt forecasting tools could help address financial market tensions resulting from blind spots in debt dynamics.
    October 18, 2017   doi: 10.1002/ijfe.1598   open full text
  • US macroannouncements and international asset pricing.
    Ding Du.
    International Journal of Finance & Economics. October 17, 2017
    The world capital asset‐pricing model is the benchmark model in international finance. However, recent research finds that the premium on the world market factor is insignificant. In this paper, we investigate if the world market risk premium is particularly significant on US macroeconomic announcement days. Empirically, we apply the methodology to daily country exchange‐traded funds. Our findings suggest that although the world market risk premium is insignificant on nonannouncement days, it is strongly significant on US macroeconomic announcement days. In addition, we find that US monetary policy announcements are the most important macroeconomic announcements to drive the world market risk premium. Our findings are consistent with the notion of monetary policy uncertainty and the empirical literature that connects policy uncertainty with systematic risk.
    October 17, 2017   doi: 10.1002/ijfe.1592   open full text
  • On equity risk prediction and tail spillovers.
    Panos Pouliasis, Ioannis Kyriakou, Nikos Papapostolou.
    International Journal of Finance & Economics. October 16, 2017
    This paper studies the impact of modelling time‐varying variances of stock returns in terms of risk measurement and extreme risk spillover. Using a general class of regime‐dependent models, we find that volatility can be disaggregated into distinct components: a persistent stable process with low sensitivity to shocks and a high volatility process capturing rather short‐lived rare events. Out‐of‐sample forecasts show that, once regime shifts are accounted for, accuracy is improved compared to the standard generalized autoregressive conditional heteroscedasticity or the historical volatility model. Volatility plays an important role in controlling and monitoring financial risks. Therefore, by means of a risk management application, we illustrate the economic value and the practical implications of risk control ability of the models in terms of value at risk. Finally, tests for predictability in co‐movements in the tails of stock index returns suggest that large losses are strongly correlated, supporting asymmetric transmission processes for financial contagion in the left tail of return distributions, whereas contagion in reverse direction (gains) is weak.
    October 16, 2017   doi: 10.1002/ijfe.1594   open full text
  • The assessment of the United States quantitative easing policy: Evidence from global stock markets.
    Jung‐Bin Su, Ken Hung.
    International Journal of Finance & Economics. October 16, 2017
    This study assesses the performance of the quantitative easing policy implemented by the United States (US) on the stock markets with a framework of structure break. The empirical results show that the business cycle or the value of gross domestic production has a negative impact on the stock markets for most of the countries even if both gross domestic production and many stock prices are procyclical. Moreover, the purchases of US Treasury securities and mortgage‐backed securities respectively affect the stock markets synchronously and laggardly. Notably, they both have a positive impact on the stock markets during the study period. Finally, during the after structure break period, the volatility can be easily affected by bad news, and the investors have the lower profit or even the greater loss and bear the greater risk and variation of risk owing to the global financial crisis caused by the US. On the basis of the above findings, some policy implications are offered in this study.
    October 16, 2017   doi: 10.1002/ijfe.1590   open full text
  • On the stock market reactions to fiscal policies.
    Pasquale Foresti, Oreste Napolitano.
    International Journal of Finance & Economics. October 16, 2017
    In this paper, a panel analysis is employed to investigate the effects of fiscal policies on stock market indexes in 11 members of the Eurozone. Many studies have focused on the effects of monetary policy on the stock market, whereas the number of contributions studying the effects of fiscal policy on the stock market is surprisingly limited. Therefore, we know little, if any, on the sign and stability of the stock market reaction to fiscal policies. Our results show that fiscal policies influence the stock market and that, following an increase (decrease) in public deficit, stock market indexes go down (up). Nevertheless, further analysis shows that the signs of the estimated stock market reactions are not constant over time and that they change according to the surrounding macroeconomic scenario.
    October 16, 2017   doi: 10.1002/ijfe.1584   open full text
  • The importance of firm level multinationality in the country versus industry debate.
    Cormac Mullen, Jenny Berrill.
    International Journal of Finance & Economics. October 13, 2017
    We conduct the most comprehensive empirical analysis that exists to date of the effect multinationality has on the explanatory power of country and industry factors in international diversification. We investigate the impact the size, scope, and location of a company's international sales has on country versus industry factors, analysing 1,276 firms from Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, the UK, and the US over the 15‐year period, 1998–2012. We find that the magnitude of the country factor is greater than the magnitude of the industry factor for the period as a whole but that a company's level of international sales has a greater impact on the magnitude of its industry factor than the magnitude of its country factor. Counter‐intuitively, we find stocks with lower sales exposure to their country of origin have a higher country factor, and we show the existence of both a strong local and international industry factor. Our results suggest country‐of‐origin diversification may no longer be sufficient to exploit country‐specific risk and the country factor has become a “country classification” factor.
    October 13, 2017   doi: 10.1002/ijfe.1597   open full text
  • Central bank swap lines and CIP deviations.
    William A. Allen, Gabriele Galati, Richhild Moessner, William Nelson.
    International Journal of Finance & Economics. October 12, 2017
    We study the use of U.S. dollar central bank swap lines as a tool for addressing dislocations in the foreign currency swap market against the USD since the global financial crisis. We find that the use of the Federal Reserve's USD central bank swap lines was mainly related to tensions in U.S. money markets during times of financial crisis, and less to tensions that were confined to foreign exchange swap markets. In particular, we find that the use of USD central bank swap lines did not react significantly to the recent period of persistent deviations of covered interest parity since 2014. These results are consistent with the view that the Federal Reserve was guided by enlightened self‐interest when providing swap lines to foreign central banks, in order to reduce dislocations in U.S. financial markets and support financial stability. In recent years, foreign exchange swap markets have not functioned properly, but it appears that now that the crisis is over, the Federal Reserve and other central banks have decided against trying permanently to fill the gap left by the dysfunction in the commercial foreign exchange swap market.
    October 12, 2017   doi: 10.1002/ijfe.1596   open full text
  • Corporate governance structure and efficiencies of cooperative banks.
    Nobuyoshi Yamori, Kozo Harimaya, Kei Tomimura.
    International Journal of Finance & Economics. October 11, 2017
    How to discipline managers of cooperative structured financial institutions (co‐ops) is considered a critical issue by the Japanese financial regulatory authorities because co‐ops play a significant role in the domestic banking market, especially for small and medium‐sized enterprises. This paper seeks to clarify whether the effect of the governance‐related variables on firm performance varies across stock and cooperative banks in Japan. We consider regional banks as a proxy of stock banks and Shinkin banks, one of the representative co‐ops, as a proxy of cooperative banks. We use cost and profit efficiency scores obtained from stochastic frontier analysis as performance measures. The results in this paper confirmed that having a large number of board members has negative effects on efficiency measures for both stock and cooperative banks. On the other hand, the presence of outside directors has a significant effect on efficiency measures for cooperative banks, whereas such variables have no significant effect for stock banks. These results suggest that outside directors' discipline is more necessary for cooperative banks than for stock banks, which are under strong pressure from shareholders. For cooperative banks, a high ratio of representative council members, which is the most important decision‐making body for Shinkin banks, has negative effects on efficiency measures. Our findings support the current proposals of the financial regulatory authorities' council to appoint outside directors to the board as a means for strengthening governance of the co‐ops.
    October 11, 2017   doi: 10.1002/ijfe.1593   open full text
  • Economics blogs sentiment and asset prices.
    Vincenzo Farina, Antonio Parisi, Ugo Pomante.
    International Journal of Finance & Economics. October 11, 2017
    One of the most important research streams in finance is to understand the determinants of stock market dynamics. Using a large amount of linguistic data regarding 960,808 posts during a 5‐year time period (from March 1, 2008, to August 31, 2013), we develop an economics blogs pessimism indicator (considered as a proxy for either investor sentiment or risk aversion), and we show its validity to build performing trading strategies.
    October 11, 2017   doi: 10.1002/ijfe.1591   open full text
  • Mean and variance equation dynamics: Time deformation, GARCH, and a robust analysis of the London housing market.
    Steve Cook, Duncan Watson.
    International Journal of Finance & Economics. October 06, 2017
    The potential relationship between time deformation and generalized autoregressive conditional heteroscedasticity (GARCH) is examined. Despite time deformation and GARCH being mean and variance equation phenomena, respectively, they are argued herein to share a common motivation relating to the examination of changes in the temporal evolution of time‐series processes. Via extensive simulation analysis, a close connection between the two concepts is established. It is found that the presence of GARCH can result in the spurious detection of time deformation, particularly when examining the heavy‐tailed distributions and volatile data typically considered in empirical finance. It is shown that although the application of heteroskedasticity corrected covariance matrix estimators often increases, rather than corrects, the detected oversizing of the tests of time deformation, the application of GARCH filters does provide a solution to size distortion. The findings of the experimental analysis are drawn upon to provide a robust empirical examination of the London housing market where evidence of overwhelming and widespread nonlinearity is detected in the form of time deformation. The implications of these findings for the conduct of future, and the interpretation of previous, research are discussed.
    October 06, 2017   doi: 10.1002/ijfe.1589   open full text
  • Determinants of long‐ versus short‐term bank credit in EU countries.
    Haelim Park Anderson, Claudia Ruiz‐Ortega, Thierry Tressel.
    International Journal of Finance & Economics. October 02, 2017
    This paper empirically examines the determinants of credit at different maturities across countries of the European Union during the last decade. We document the lengthening of maturities since the early 2000s and whether these patterns were driven by similar factors in advanced and emerging market economies. Before the 2008 crisis, long‐term credit expanded faster than short‐term credit in most countries of our sample and contracted less than short‐term credit after 2008. We find that foreign liabilities were more important sources of funding in emerging market countries than in advanced economies. In addition, aggregate demand mattered less for credit extension to firms in emerging market countries than in advanced countries.
    October 02, 2017   doi: 10.1002/ijfe.1583   open full text
  • Mutual fund skill in timing market volatility and liquidity.
    Jason Foran, Niall O'Sullivan.
    International Journal of Finance & Economics. July 31, 2017
    We investigate both market volatility timing and market liquidity timing for the first time among UK mutual funds. We find strong evidence that a small percentage of funds time market volatility successfully, that is, when conditional market volatility is higher than normal, systematic risk levels are lower. The evidence around market liquidity timing ability is similar although it is slightly less prevalent compared to volatility timing. Here, funds lower the fund market beta in anticipation of reduced market liquidity. We also find a positive relation between liquidity timing ability and fund abnormal performance where skilled liquidity timers outperform unskilled timers by around 3% p.a.—though this finding is driven by poor liquidity timing funds going on to yield negative alpha. However, despite the evidence of volatility and liquidity timing ability among funds, we fail to find in support of persistence in this timing. We find little evidence supporting market return timing ability.
    July 31, 2017   doi: 10.1002/ijfe.1580   open full text
  • Euro area time‐varying fiscal sustainability.
    António Afonso, João Tovar Jalles.
    International Journal of Finance & Economics. July 11, 2017
    We assess the time‐varying features of fiscal sustainability in the euro area via revisiting the empirical relationship between the primary budget surplus and the debt‐to‐GDP ratio. Focusing on a sample of 11 Euro‐area countries between 1999Q1 and 2013Q4 and by means of time series analyses, we find that (a) fiscal policy seems to have been sustainable in Belgium, France, Germany, and the Netherlands and a Ricardian (monetary dominant) regime might have been present; (b) debt exhibited a negative response following an innovation in the budget surplus in half of the sample; (c) the time‐varying coefficient model shows that the 2008–2009 global economic and financial crisis exerted a sizeable negative impact on fiscal sustainability; and (d) expenditure‐based fiscal rules are strong determinants of fiscal sustainability. All in all, we found some evidence against the Fiscal Theory of the Price Level.
    July 11, 2017   doi: 10.1002/ijfe.1582   open full text
  • Alphas in disguise: A new approach to uncovering them.
    Venkata Chinthalapati, Cesario Mateus, Natasa Todorovic.
    International Journal of Finance & Economics. July 10, 2017
    Four‐factor Carhart alphas of passive indices should be zero, but recent empirical evidence shows otherwise. We propose an optimization algorithm that makes small (fixed) adjustments to the time series of the market, size, value, and momentum factors, which ensures a zero alpha for any (single) self‐designated benchmark index of a mutual fund. Our “adjusted factors” can then be used to estimate a mutual fund's “adjusted alpha.” We test this methodology on a sample of 1,281 active and 102 tracker U.S. equity mutual funds (reporting S&P 500 index as their prospectus benchmark). Our time series adjustment of the Carhart 4 factors leads to an increase (decrease) in a fund's “adjusted alpha” in periods of fund‐benchmark underperformance (outperformance). On the whole, our “adjusted alphas” of both active and tracker funds are statistically significantly negative. This is particularly pronounced for tracker funds.
    July 10, 2017   doi: 10.1002/ijfe.1581   open full text
  • What drives differences of opinion in sovereign ratings? The roles of information disclosure and political risk.
    Huong Vu, Rasha Alsakka, Owain Gwilym.
    International Journal of Finance & Economics. April 27, 2017
    This paper investigates the causes of split sovereign ratings across S&P, Moody's, and Fitch for 64 countries from 1997 to 2011. We identify that split sovereign ratings are not symmetric, with S&P tending to be the most conservative agency. We find that opaque sovereigns are more likely to receive split ratings. Political risk plays a highly significant role in explaining split ratings and dominates economic and financial indicators. Out‐of‐sample model performance is enhanced by capturing political risk. Government information disclosure affects split ratings between Moody's and Fitch in emerging countries. The study implies an incentive for governments to reduce political uncertainty and to enhance transparency.
    April 27, 2017   doi: 10.1002/ijfe.1579   open full text
  • The role of time‐varying return forecasts for improving international diversification benefits.
    Maria del Mar Miralles‐Quiros, Jose Luis Miralles‐Quiros.
    International Journal of Finance & Economics. April 12, 2017
    The aim of this study is to provide empirical evidence of the international diversification benefits obtained employing not only time‐varying volatility forecasts but also time‐varying return forecasts from a multivariate approach that considers the dynamic relationships in return series as well as in volatilities and correlations. To that end, instead of using market indexes from different investment areas, we employ exchange trade funds actively traded on the New York Stock Exchange in recent years. It avoids nonsynchronous problems as well as allowing us to allocate internationally on a daily basis for which this approach is especially appropriate. Our overall results show that using this technique, it is possible to obtain economic gains and outperform the common benchmark strategies, even when the costs associated with the daily rebalance of each portfolio are taken into account.
    April 12, 2017   doi: 10.1002/ijfe.1578   open full text
  • How fat are the tails of equity market indices?
    Stoyan Stoyanov, Lixia Loh, Frank J. Fabozzi.
    International Journal of Finance & Economics. March 21, 2017
    Using a generalized autoregressive conditional heteroskedasticity model to explain away the volatility clustering of volatility effect and extreme value theory to analyse the residuals' left and right tails, we study the tail thickness of 22 developed and 19 emerging equity market indices. In‐sample and out‐of‐sample tests indicate that exponential tails of the residuals cannot be strongly rejected. We study the dispersion of extremes of developed and emerging markets, and we report a statistically significant tail asymmetry in both types of markets and a significant change in both tail risk and tail asymmetry of emerging markets after the financial crisis of 2008.
    March 21, 2017   doi: 10.1002/ijfe.1577   open full text
  • Multilateral Loans and Interest Rates: Further Evidence on the Seniority Conundrum.
    Sven Steinkamp, Frank Westermann.
    International Journal of Finance & Economics. March 20, 2017
    During Europe's sovereign debt crisis, interest rate spreads have been highly correlated with the share of multilateral loans that were considered senior to private markets. As both variables are potentially endogenous, we follow 2 different approaches to analyze the direction of causality. First, we use a set of instrumental variable regressions where the differences between sovereign ratings serve as instruments. Second, we analyze a new panel survey dataset on seniority and interest rate expectations. In both approaches, we find evidence for the seniority conundrum, that is, a positive impact of multilateral loans on interest rate spreads.
    March 20, 2017   doi: 10.1002/ijfe.1575   open full text
  • Eurozone cycles: An analysis of phase synchronization.
    Brigitte Granville, Sana Hussain.
    International Journal of Finance & Economics. March 16, 2017
    This paper analyses synchronization, both across and between business and financial cycles (growth and classical) in a subset of 10 countries representative of the Economic and Monetary Union. Employing an extended data set from 1960 to 2013, we find evidence of synchronization across financial cycles. In case of business cycles, we find contrasting results: There is significant synchronization across growth cycles but no evidence of a common classical cycle. This confirms, first, that economic and financial variables in the Economic and Monetary Union behave differently and, second, that synchronization in business cycles arises from synchronized deviations from the trend, but the underlying macroeconomic fundamentals are not in synch. Furthermore, we adopt a novel approach to break down our full sample period into smaller subperiods to follow the evolution of synchronization over time. Our results highlight the role played by the monetary union in further increasing macroeconomic divergences.
    March 16, 2017   doi: 10.1002/ijfe.1576   open full text
  • Equity flows, stock returns and exchange rates.
    Angelos Kanas, Sotirios Karkalakos.
    International Journal of Finance & Economics. March 06, 2017
    We explore the effects of equity flows between U.S. and U.K. investors upon equity and exchange rate returns within a unified empirical framework on the basis of a trivariate vector autoregressive system that incorporates mean and volatility spillovers and allows for dynamic conditional correlations. Our findings are as follows: First, we reveal strong evidence of volatility spillovers across equity returns, exchange rate returns, and equity flows. Second, we find strong evidence that U.K. investors rebalance their portfolios by engaging in a positive feedback trading known in the literature as “trend chasing.” Third, we document strong dynamic effects from net flows to equity returns, illustrating a trading rule that portfolios are dynamically adjusted over a short‐run horizon influencing changes in stock returns. Last, correlation uncertainty appears to be reduced from the start of the 1990s onwards.
    March 06, 2017   doi: 10.1002/ijfe.1574   open full text
  • Pricing the ECB's forward guidance with the EONIA swap curve.
    Matthieu Picault.
    International Journal of Finance & Economics. February 27, 2017
    On July 4, 2013, following several other major central banks, the European Central Bank (ECB) gave for the first time forward guidance on interest rates, which affected market participants' expectations of future interest rates in the context of a Zero Lower Bound. Using an ARMAX(1,1) model in which the effect of the communication of negative macroeconomic news was disentangled from the commitment positive shock, the impact of the forward guidance on money market interest rates is estimated through the Euro Overnight Index Average swap, also called overnight index swap, at maturities between 2 months and 10 years using abnormal returns from an event study. The results and robustness checks suggest that the ECB's guidance lowered overnight index swap rates for maturities within 10 months to 3 years. These results imply the existence of a commitment effect from the ECB's communication. In the context of decreasing market liquidity because of the 3‐year long‐term refinancing operation repayment, market participants priced the low period of interest rates until mid‐2016.
    February 27, 2017   doi: 10.1002/ijfe.1572   open full text
  • Monetary policy and leverage shocks.
    Khandokar Istiak, Apostolos Serletis.
    International Journal of Finance & Economics. January 24, 2017
    The current mainstream approach to monetary policy in the United States is based on the new Keynesian model and is expressed in terms of the federal funds rate. It ignores the role of financial intermediary leverage (or collateral rates). But as the federal funds rate has reached the zero lower bound, the issue is whether there is a useful role of leverage in monetary policy and business cycle analysis. Motivated by these considerations and by recent financial intermediary asset pricing theories in this paper, we investigate the macroeconomic effects of broker–dealer leverage and the interdependence between monetary policy and broker–dealer leverage in the context of a structural vector autoregression model, using quarterly U.S. data over the period from 1967:1 to 2014:3. We address the simultaneity problem of identifying monetary policy and leverage shocks by using a combination of short‐run and long‐run restrictions. We also use the sign restriction approach to the identification of shocks to distinguish between leverage supply and leverage demand shocks, as one would expect the macroeconomic effects of these two types of leverage shocks to be quite different. Our results show that monetary policy and broker–dealer leverage demand shocks produce results that capture reasonable macroeconomic dynamics.
    January 24, 2017   doi: 10.1002/ijfe.1571   open full text
  • Is there still a Berlin Wall in the post‐issue operating performance of European IPOs?
    Tiago Pinho Pereira, Miguel Sousa.
    International Journal of Finance & Economics. January 06, 2017
    This paper studies the post‐IPO operating performance of a sample of 555 European firms that went public between 1995 and 2006. Consistent with previous findings, we observe a decline in post‐issue operating performance of IPO firms. However, firms located in emerging European countries perform even worse after the IPO than firms located in developed European countries. Our results suggest that this less successful post‐issue operating performance by firms located in emerging countries can be explained by a more aggressive use of accruals and a better timing of the IPO in order to coincide with a period of high operating performance.
    January 06, 2017   doi: 10.1002/ijfe.1573   open full text
  • Banking and Currency Crises: Differential Diagnostics for Developed Countries.
    Mark Joy, Marek Rusnák, Kateřina Šmídková, Bořek Vašíček.
    International Journal of Finance & Economics. November 07, 2016
    We identify a set of ‘rules of thumb’ that characterize economic, financial and structural conditions preceding the onset of banking and currency crises in 36 advanced economies over 1970–2010. We use the classification and regression tree methodology and its random forest extension, which permits the detection of key variables driving binary crisis outcomes, allows for interactions among key variables and determines critical tipping points. We distinguish between basic country conditions, country structural characteristics and international developments. We find that crises are more varied than they are similar. For banking crises, we find that low net interest rate spreads in the banking sector and a shallow, or inverted, yield curve is their most important forerunners in the short term. In the longer term, it is high house price inflation. For currency crises, high domestic short‐term rates coupled with overvalued exchange rates are the most powerful short‐term predictors. We find that both country structural characteristics and international developments are relevant banking‐crisis predictors. Currency crises, however, seem to be driven more by country idiosyncratic, short‐term developments. We find that some variables, such as the domestic credit gap, provide important unconditional signals, but it is difficult to use them as conditional signals and, more importantly, to find relevant threshold values. Copyright © 2016 John Wiley & Sons, Ltd.
    November 07, 2016   doi: 10.1002/ijfe.1570   open full text
  • Corporate Governance, Bank Mergers and Executive Compensation.
    Yan Liu, Carol Padgett, Simone Varotto.
    International Journal of Finance & Economics. November 04, 2016
    Using a sample of US bank mergers from 1995 to 2012, we observe that the pre‐post merger changes in CEO bonus are significantly negatively related to the strength of corporate governance within the bidding bank. This suggests that bonus compensation is not consistent with the ‘optimal contracting hypothesis’. Salary changes, on the other hand, are not affected by corporate governance which is in line with ‘optimal contracting’. We also find that good governance is associated with more accretive deals for the bidder. Overall, our results are consistent with the notion that, unlike salary and long‐term compensation, bonus compensation is not aligned with value creation and is more vulnerable to CEO manipulation in banks with poor corporate governance. Copyright © 2016 John Wiley & Sons, Ltd.
    November 04, 2016   doi: 10.1002/ijfe.1565   open full text
  • Benchmarking Judgmentally Adjusted Forecasts.
    Philip Hans Franses, Bert Bruijn.
    International Journal of Finance & Economics. October 26, 2016
    Many publicly available macroeconomic forecasts are judgmentally adjusted model‐based forecasts. In practice, usually only a single final forecast is available, and not the underlying econometric model, nor are the size and reason for adjustment known. Hence, the relative weights given to the model forecasts and to the judgement are usually unknown to the analyst. This paper proposes a methodology to evaluate the quality of such final forecasts, also to allow learning from past errors. To do so, the analyst needs benchmark forecasts. We propose two such benchmarks. The first is the simple no‐change forecast, which is the bottom line forecast that an expert should be able to improve. The second benchmark is an estimated model‐based forecast, which is found as the best forecast given the realizations and the final forecasts. We illustrate this methodology for two sets of GDP growth forecasts, one for the USA and one for the Netherlands. These applications tell us that adjustment appears most effective in periods of first recovery from a recession. Copyright © 2016 John Wiley & Sons, Ltd.
    October 26, 2016   doi: 10.1002/ijfe.1569   open full text
  • Euro Effect on Trade in Final, Intermediate and Capital Goods.
    Inmaculada Martínez‐Zarzoso, Florian Johannsen.
    International Journal of Finance & Economics. October 13, 2016
    The aim of this paper is to provide fresh evidence on the effect of the adoption of the euro on exports of different types of goods. The novelty with respect to previous research is threefold. First, disaggregated trade data are used to allow for heterogeneous effects for final intermediate and capital goods. Second, we distinguish between the euro effect on the extensive and the intensive margins of trade. Finally, we estimate the impact of the Euro adoption controlling for exchange rate volatility, exchange rate movements and EU membership. This allows us to disentangle the effect of a common currency beyond the elimination of trade barriers and of any variation in the exchange rate. The main results indicate that the impact of the Euro on trade values (intensive margin) is around 9% for intermediates, 7% for final goods and it is negative for capital goods. Interestingly, the Euro effects on the extensive margin of trade are found to be negative and significant for the three types of goods, pointing to increasing specialization. Copyright © 2016 John Wiley & Sons, Ltd.
    October 13, 2016   doi: 10.1002/ijfe.1567   open full text
  • Financial Cycle, Business Cycle and Monetary Policy: Evidence from Four Major Economies.
    Yong Ma, Jinglan Zhang.
    International Journal of Finance & Economics. October 11, 2016
    Economists used to think that financial factors are not important in the business cycle, but the 2008 global financial crisis has made it apparent that financial cycle plays a much larger role in macroeconomic dynamics than anticipated. Against this background, economists endeavor to introduce financial factors into macroeconomic models. In this paper, we incorporate financial cycle into a four‐equation model to study the linkages and interactions between financial cycle, business cycle and monetary policy. The results suggest that financial cycle plays a significant role in the business cycle, and that financial cycle shock has become a main driving force for macroeconomic fluctuations, especially during times of financial instability. In addition, by comparing the performance of the finance‐augmented Taylor rule with that of the conventional Taylor rule, we find that both the financial system and the real economy will be better stabilized under the finance‐augmented Taylor rule. This result adds new evidence to the argument that monetary policy has an important role in safeguarding the financial system and that financial stability should be adopted as a target for monetary policy. Copyright © 2016 John Wiley & Sons, Ltd.
    October 11, 2016   doi: 10.1002/ijfe.1566   open full text
  • Macro News and Commodity Returns.
    Guglielmo Maria Caporale, Fabio Spagnolo, Nicola Spagnolo.
    International Journal of Finance & Economics. October 11, 2016
    This paper adopts a vector autoregression‐generalized autoregressive conditional heteroscedasticity approach to model the dynamic linkages between both mean and variance of macro news and commodity returns (Gold, Corn, Wheat, Soybeans, Silver, Platinum, Palladium, Copper, Aluminium and Crude Oil) over the period 01/01/2001–26/09/2014. The chosen specification also controls for the effect of the exchange rate. The results can be summarized as follows. Mean spillovers running from news to commodity returns are positive with the exception of Gold and Silver. Volatility spillovers are bigger in size and affect most commodity returns. Both first‐moment and second‐moment linkages are stronger in the post‐September 2008 period. Overall, our findings confirm that commodities, despite not being financial assets, are sensitive to macro news (especially their volatility) and also suggest that the global financial crisis has strengthened such linkages. Copyright © 2016 John Wiley & Sons, Ltd.
    October 11, 2016   doi: 10.1002/ijfe.1568   open full text
  • Intraday Rallies and Crashes: Spillovers of Trading Halts.
    Bei Cui, Arie E. Gozluklu.
    International Journal of Finance & Economics. August 12, 2016
    This paper analyses a set of intraday rally and crash events at the firm level during the single‐stock circuit breaker program and documents the cross‐sectional spillover effects of such events on non‐halted stocks. We test whether such major price jumps, and subsequent trading halts, affect related stocks through the destabilizing eme price movements that trigger the circuit breakers at the firm level are accompanied by a massive surge in volume, spread and short‐term volatility, which gradually revert back to normal. Speculative strategies of arbitrageurs such as momentum and pairs trading cause cross‐sectional spillovers in volume and volatility during the trading halt. Copyright © 2016 John Wiley & Sons, Ltd.
    August 12, 2016   doi: 10.1002/ijfe.1556   open full text
  • Real Effects of Inflation on External Debt in Developing Economies.
    Mark Assibey‐Yeboah, Sushanta Mallick, Mohammed Mohsin.
    International Journal of Finance & Economics. July 11, 2016
    This paper uses an intertemporal optimizing model with country‐specific risk premium to evaluate the real effects of inflation in a small open developing economy. In the model, a central bank targets inflation, and the consumer requires real balances in advance for consumption spending. We show that a positive inflation shock (either due to growth in money supply or depreciation of the domestic currency) yields a decrease in real output and consumption—as inflation creates a tax wedge in the intratemporal condition between consumption and leisure—leading to a decrease in the stock of real debt in domestic currency. Employing these theoretical predictions and using annual data from a set of six developing countries (Chile, Ghana, Indonesia, Kenya, Malaysia and Thailand), we estimate a sign‐restriction based structural vector autoregression model along with a panel vector autoregression model for robustness analysis. The empirical results support the trade‐off of inflation with reference to the key real variables including the external debt position, which is a significant result given the ambiguity in the empirical literature as to whether governments can escape from debt crisis via higher inflation. Copyright © 2016 John Wiley & Sons, Ltd.
    July 11, 2016   doi: 10.1002/ijfe.1553   open full text
  • Determinants of Liquidity (Re)Allocation and the Decision to Cross‐List or Cross‐Delist.
    Roland Füss, Ulrich Hommel, Jan‐Carl Plagge.
    International Journal of Finance & Economics. June 06, 2016
    This paper examines the factors influencing the liquidity allocation between local and foreign dual listings. Based on a comprehensive data set covering the period between 2001 and 2011, empirical results suggest that the fraction of trading in the foreign listing decreases with a higher degree of stock market integration measured as the stock price correlation with the world market. Furthermore, the analysis of individual cross‐listings reveals that both an improvement of a country's state of economic development and a better regulatory environment significantly affect the allocation of trading. While an improvement in economic development increases both local and foreign liquidity, a strengthening of regulatory standards leads to a decrease in trading volumes at foreign exchanges. Finally, the liquidity share in the foreign listing is found to decrease over time, a trend that turns out to be driven by developing rather than by developed markets. Copyright © 2016 John Wiley & Sons, Ltd.
    June 06, 2016   doi: 10.1002/ijfe.1555   open full text
  • Panel Data Models and the Uncovered Interest Parity Condition: The Role of Two‐Way Unobserved Components.
    Nils Herger.
    International Journal of Finance & Economics. June 01, 2016
    This paper endeavours to show how the specification of the regression testing the uncovered interest parity (UIP) condition can determine whether or not the hypothesized proportional relationship between international interest rate differences and exchange rate changes is rejected. Across major currencies, various terms to maturity, different data frequencies and the short as well as the long time horizon, single‐equation regressions partly reject the UIP condition. However, this ‘UIP puzzle’ tends to disappear when panel data regressions account, for example, for risk premiums by means of two‐way unobserved component specifications with random or fixed effects for both currencies and time periods. The closest concurrence with the UIP condition arises when specifying the time‐specific component as fixed effect, which provides a way to address the potential bias when unobserved exchange rate risk premiums correlate with interest rates. Copyright © 2016 John Wiley & Sons, Ltd.
    June 01, 2016   doi: 10.1002/ijfe.1552   open full text
  • Impact of Domestic Investor Protection on Foreign Investment Decisions: Evidence from Bond Markets.
    Elina Pradkhan.
    International Journal of Finance & Economics. May 26, 2016
    This study explores the relationship between domestic creditor protection and foreign investment decisions in bond markets. It also investigates how the difference between domestic and foreign creditor protections affects the foreign investment. The impact of domestic creditor protection on cross‐border investment in bonds is twofold. A high level of domestic creditor protection increases international diversification. At the same time, an efficient protection of creditor rights at home reduces the sensitivity of foreign investment to foreign creditor protection. These results hold most strongly for investing countries with high levels of domestic creditor protection. In addition, this study shows that the difference between domestic and foreign creditor protections matters for investment decisions: if domestic creditor protection is more efficient than foreign creditor protection, the sensitivity of foreign investment to foreign (domestic) creditor protection decreases (increases). Copyright © 2016 John Wiley & Sons, Ltd.
    May 26, 2016   doi: 10.1002/ijfe.1554   open full text
  • Sovereign Credit Ratings in Developing Economies: New Empirical Assessment.
    Gabriel Caldas Montes, Diego S. P. Oliveira, Helder Ferreira Mendonça.
    International Journal of Finance & Economics. May 24, 2016
    This study contributes to understanding the main determinants of sovereign ratings for developing countries making use of information from Standard & Poor's, Moody's, and Fitch. Based on a sample of 40 countries for the period 1994 to 2013 and panel data approach, we extended previous works in the literature by including new economic aspects, as well as, new institutional and governance variables (e.g. inflation targeting, financial openness, democracy, corruption, etc.). The findings denote that, besides the traditional macroeconomic variables, adoption of inflation targeting, financial openness, democracy, law and order, and less corruption are important to improve the sovereign ratings. Copyright © 2016 John Wiley & Sons, Ltd.
    May 24, 2016   doi: 10.1002/ijfe.1551   open full text
  • Danger Zones for Banking Crises in Emerging Markets.
    Paolo Manasse, Roberto Savona, Marika Vezzoli.
    International Journal of Finance & Economics. April 04, 2016
    This paper employs a recently developed statistical algorithm in order to build an early warning model for banking crises in emerging markets. The procedure creates many ‘artificial’ samples by iteratively perturbing the original data set and estimates many models from these samples. The final model is constructed by aggregation, so that, by construction, it is flexible enough to accommodate new data for out‐of‐sample prediction. Out of a large number (540) of candidate explanatory variables, ranging from macroeconomic variables to balance sheet indicators, our procedure selects a handful of indicators (and their combinations) that is sufficient to generate accurate out‐of‐sample predictions of banking crises. Using data covering emerging markets from 1980 to 2010, the model identifies two banking crisis' ‘danger‐zones’, e.g. economic configurations that are conducive to crises. The first occurs when high interest rates on bank deposits, possibly reflecting liquidity risks and solvency fears, interact with credit‐booms and capital flights; the second occurs when an investment boom is financed by a large rise in banks' net foreign exposure. We compare our model to models derived by standard econometric techniques, and find that our approach delivers much better out‐of‐sample predictions. Copyright © 2016 John Wiley & Sons, Ltd.
    April 04, 2016   doi: 10.1002/ijfe.1550   open full text
  • International Sentiment Spillovers in Equity Returns.
    Deven Bathia, Don Bredin, Dirk Nitzsche.
    International Journal of Finance & Economics. February 23, 2016
    This paper examines the extent of spillovers from US investor sentiment on G7 aggregate market, value and growth stock returns. As a proxy for investor sentiment, we include individual investor survey, measured by the University of Michigan consumer confidence index and market sentiment measured by Baker and Wurgler composite sentiment index. Using monthly data for the period January 1991 to December 2013, our results indicate the presence of significant spillover effects of US investor sentiment on G7 stock returns. Our findings from generalized impulse response functions show that aggregate market and growth stocks of all non‐US G7 countries are significantly affected by the propagation of the US market sentiment. The financial crisis of 2007 has played a significant role in affecting value stock returns in these countries. Our findings further reveal that both the rational and irrational components of the US individual investor sentiment do not play any significant role in affecting international stock returns. Copyright © 2016 John Wiley & Sons, Ltd.
    February 23, 2016   doi: 10.1002/ijfe.1549   open full text
  • The Risk Premium, Interest Rate Determination, and Monetary Independence Under a Fixed, but Adjustable, Exchange Rate.
    Kit Pasula.
    International Journal of Finance & Economics. February 17, 2016
    This paper examines interest rate determination and monetary independence in a small economy with a fixed exchange rate. The risk premium is determined endogenously in the stochastic, general‐equilibrium model. The sign of the risk premium and the magnitude of the interest rate depend on the specification of the policy rule for the future exchange rate. Increases in domestic credit can decrease, increase or have no effect on the interest rate. The offset coefficient can differ from −1 (the ‘trilemma’ may not hold), but numerical calculations indicate that the offset is close to −1. Under certain conditions, empirical analyses overestimate monetary independence. Copyright © 2016 John Wiley & Sons, Ltd.
    February 17, 2016   doi: 10.1002/ijfe.1548   open full text
  • Asymmetric Monetary Policy Rules for an Open Economy: Evidence from Canada and the UK.
    Mustafa Caglayan, Zainab Jehan, Kostas Mouratidis.
    International Journal of Finance & Economics. February 17, 2016
    We present an analytical framework to examine the open economy monetary policy rule of a central bank under asymmetric preferences. The resulting policy rule is then empirically examined using quarterly data with regard to Canada and the UK from 1983q1 to 2007q4. Our empirical investigation shows that the open economy policy rule receives support from the data and that the monetary policy makers in the UK and Canada have asymmetric preferences. Robustness checks based on model calibration provide support for the suggested policy rule. Copyright © 2016 John Wiley & Sons, Ltd.
    February 17, 2016   doi: 10.1002/ijfe.1547   open full text
  • What Does Rebalancing Really Achieve?
    Keith Cuthbertson, Simon Hayley, Nick Motson, Dirk Nitzsche.
    International Journal of Finance & Economics. February 17, 2016
    There is now a substantial literature on the effects of rebalancing on portfolio performance. However, this literature contains frequent misattribution between ‘rebalancing returns’, which are specific to the act of rebalancing, and ‘diversification returns’, which can be earned by both rebalanced and unrebalanced strategies. Confusion on this issue can encourage investors to follow strategies that involve insufficient diversification and excessive transactions costs. This paper identifies the misleading claims that are made for rebalanced strategies and demonstrates in theory and by simulation that the apparent advantages of rebalanced strategies over infinite horizons give an inaccurate impression of their performance over finite horizons. Copyright © 2016 John Wiley & Sons, Ltd.
    February 17, 2016   doi: 10.1002/ijfe.1545   open full text
  • Convergence in Corporate Statutory Tax Rates in the Asian and Pacific Economies.
    Yang Chen, Juan Carlos Cuestas, Paulo José Regis.
    International Journal of Finance & Economics. February 15, 2016
    Countries in the Asia and Pacific region have shown many macroeconomic similarities during a period of economic integration. This paper argues that there may be one more macroeconomic feature to add to the list: strong statutory tax convergence. Using data on the statutory corporate tax rate in 15 countries from 1980 to 2014, we identify (i) a significant dynamic tax convergence pattern and (ii) three tax convergence clubs. The latter consist of the small tax haven economies of Hong Kong and Singapore, the East Asian countries (plus one) and the South and Southeast Asian and Oceania countries. These economies, within groups, have been reducing the tax gaps with their neighbours over time. Copyright © 2016 John Wiley & Sons, Ltd.
    February 15, 2016   doi: 10.1002/ijfe.1546   open full text
  • The Role of a Changing Market Environment for Credit Default Swap Pricing.
    Julian S. Leppin, Stefan Reitz.
    International Journal of Finance & Economics. January 14, 2016
    This paper investigates the impact of a changing market environment on the pricing of credit default swaps (CDS) spreads written on debt from EURO STOXX 50 firms. A panel smooth transition regression reveals that parameter estimates of standard CDS‐pricing variables are time varying depending on current values of a set of variables such as the European Central Bank's systemic stress composite index, the Sentix index for the current and future economic situation and the VStoxx. These variables describe the market's transition between different regimes, thereby reflecting the impact of substantial swings in agents' risk perception on CDS spreads. Overall, our results confirm the importance of nonlinearities in the pricing of risk derivatives during tranquil and turbulent times. Copyright © 2016 John Wiley & Sons, Ltd.
    January 14, 2016   doi: 10.1002/ijfe.1543   open full text
  • Current Account Reversals in Industrial Countries: does the Exchange Rate Regime Matter?
    Cosimo Pancaro, Christian Saborowski.
    International Journal of Finance & Economics. December 21, 2015
    This paper studies current account reversals in industrial countries across different exchange rate regimes. There are two major findings which have important implications for industrial economies with external imbalances: first, triggers of current account reversals differ between exchange rate regimes. While the current account deficit and the output gap are significant predictors of reversals across all regimes, reserve coverage, credit booms, openness to trade and the US short term interest rate determine the likelihood of reversals only under more rigid regimes. Conversely, the real exchange rate affects the probability of experiencing a reversal only under flexible arrangements. Second, current account reversals in advanced economies do not have an independent effect on growth. This result holds not only for industrial economies in general but also for countries with fixed exchange rate regimes in particular. Copyright © 2015 John Wiley & Sons, Ltd.
    December 21, 2015   doi: 10.1002/ijfe.1535   open full text
  • Monetary Developments and Expansionary Fiscal Consolidations: Evidence from the EMU.
    António Afonso, Luís Martins.
    International Journal of Finance & Economics. December 17, 2015
    We provide new insights into the existence of expansionary fiscal consolidations in the Economic and Monetary Union, using annual panel data from 14 European Union countries, over the period of 1970–2013. Different measures were calculated for assessing fiscal consolidations, based on the changes in the cyclically adjusted primary balance. A similar ad hoc approach was used to compute monetary episodes. Panel estimations for private consumption show that, in some cases, when fiscal consolidations are coupled with monetary expansions, the traditional Keynesian signals are reversed in the cases of general government final consumption expenditure, social transfers and taxes. Keynesian effects prevail when fiscal consolidations are not matched by monetary easing. Panel probit estimations suggest that longer consolidations contribute positively to its success, whilst the opposite is the case for revenue‐based ones. Copyright © 2015 John Wiley & Sons, Ltd.
    December 17, 2015   doi: 10.1002/ijfe.1544   open full text
  • Can High‐frequency Trading Strategies Constantly Beat the Market?
    Viktor Manahov.
    International Journal of Finance & Economics. November 25, 2015
    Policymakers are still debating whether or not high‐frequency trading (HFT) is beneficial or harmful to financial markets. We develop four artificial stock markets populated with HFT scalpers and aggressive high‐frequency traders using Strongly Typed Genetic Programming trading algorithm. We simulate real‐life HFT by applying Strongly Typed Genetic Programming to real‐time millisecond data of Apple, Bank of America, Russell 1000 and Russell 2000 and observe that HFT scalpers front‐run the order flow generating persistent profits. We also use combinations of forecasting techniques as benchmarks to demonstrate that HFT scalping strategies anticipate the trading order flow and constantly beat the market. Copyright © 2015 John Wiley & Sons, Ltd.
    November 25, 2015   doi: 10.1002/ijfe.1541   open full text
  • Welfare and Stochastic Dominance for the Measurement of Banks' Domestic Systemic Importance: Analytical Framework and Application.
    Gaston Andrés Giordana.
    International Journal of Finance & Economics. November 24, 2015
    This paper proposes an analytical framework to rank alternative measures of banks' systemic importance in terms of their welfare impact. The advantage of our approach is that it does not require knowing the exact mathematical form of the underlying welfare function in the absence of a widely accepted model of systemic risk. The framework consists of two pillars. First, economic welfare is linked to the measured degree of systemic importance of banks. Second, the association between the concepts of stochastic and welfare dominance of distributions of the measured degree of systemic importance is defined. Then, the alternative measures can be welfare‐ranked by just establishing stochastic dominance relationships. An illustration is presented using Luxembourg data. Copyright © 2015 John Wiley & Sons, Ltd.
    November 24, 2015   doi: 10.1002/ijfe.1542   open full text
  • The Pass‐through of Exchange Rate in the Context of the European Sovereign Debt Crisis.
    Nidhaleddine Ben Cheikh, Christophe Rault.
    International Journal of Finance & Economics. November 11, 2015
    This paper investigates whether exchange rate pass‐through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so‐called GIIPS group (Greece, Ireland, Italy, Portugal and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, that is, when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis have entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass‐through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits. Copyright © 2015 John Wiley & Sons, Ltd.
    November 11, 2015   doi: 10.1002/ijfe.1539   open full text
  • Linkages Between the US and European Stock Markets: A Fractional Cointegration Approach.
    Guglielmo Maria Caporale, Luis A. Gil‐Alana, James C. Orlando.
    International Journal of Finance & Economics. November 03, 2015
    This paper analyses the long‐memory properties of US and European stock indices, as well as their linkages, using fractional integration and fractional cointegration techniques. These methods are more general and have higher power than the standard ones usually employed in the literature. The empirical evidence based on them suggests the presence of unit roots in both the Standard and Poor's 500 Index and the Euro Stoxx 50 Index. Also, fractional cointegration appears to hold at least for the subsample from December 1996 to March 2009 ending when the global financial crisis was still severe; subsequently, the US and European stock markets diverged and followed different recovery paths, possibly as a result of various factors such as diverging growth and monetary policy. Establishing whether the degree of cointegration has changed over time is important because past literature has shown that diversification benefits arise when markets are not cointegrated. Copyright © 2015 John Wiley & Sons, Ltd.
    November 03, 2015   doi: 10.1002/ijfe.1537   open full text
  • The Relative Predictability of Stock Markets in the Americas.
    Graham Smith, Aneta Dyakova.
    International Journal of Finance & Economics. November 03, 2015
    The degree of return predictability is measured for seven Latin American stock markets and those in Canada and the United States using three finite‐sample variance ratio tests. Daily data for the period beginning in February 1994 and ending in December 2011 are used in a fixed‐length rolling window to capture short‐lived predictability, track changes in predictability through time and rank markets by relative predictability. Overall, the degree of return predictability varies widely. The most predictable are those located in Chile and Peru; the least predictable are in Argentina and Brazil. Predictability has decreased for all of those stock markets examined, except those located in Ecuador and the United States. Predictability largely coincides with times of crisis. Copyright © 2015 John Wiley & Sons, Ltd.
    November 03, 2015   doi: 10.1002/ijfe.1536   open full text
  • The Return of the Monday Effect in European Currency Markets: An Empirical Analysis of the Impact of the Economic Crisis on Market Efficiency.
    Peter J. Bush, John E. Stephens.
    International Journal of Finance & Economics. October 15, 2015
    This paper examines the relationship of multiple currencies, coupled with the Euro, to examine if there is evidence of the return of the Monday effect as a result of the recent global economic crisis. Each currency pair, which consists of the US dollar, Japanese yen, Great British pound, Canadian dollar, and Australian dollar, is compared with the Euro to find evidence to support the presence of the Monday effect. The currency pairs are tested in 1999–2004 as the first time period, again in 2005–2009 as the second time period, and then finally in 2010–2012 as the final time period, which represents the period impacted by the economic crisis. It is the authors' contention that the economic crisis that occurred after 2008 had a significant impact in the currency markets and that the Monday effect has become more pronounced because of a weakening of market efficiency. The results provide evidence that in the 2010–2012 period three currency pairs exhibit a statistically significant Monday effect. This Monday effect was not evident in either the 1999–2004 or the 2005–2009 periods, according to our analysis. This leads the authors to postulate that the economic crisis resulting from the mortgage meltdown has had a statistically verifiable effect on currency markets throughout the world. Copyright © 2015 John Wiley & Sons, Ltd.
    October 15, 2015   doi: 10.1002/ijfe.1534   open full text
  • The Impact Of Fallen Angels On Investment Grade Corporate Bonds Portfolios: Evidence From The European Market.
    Enrica Bolognesi, Marianna Ferro, Andrea Zuccheri.
    International Journal of Finance & Economics. May 09, 2014
    This work examines the impact on the price of corporate bonds denominated in Euro of a downgrade to high yield announced by Standard & Poor's and/or Moody's Investors Service. In particular, we observe the bond price behaviour around three events. The first event is the first downgrade announcement from one of the rating agencies, and we find significant cumulative abnormal returns before and at around the event. The second event is the downgrade announcement by the second rating agency: in this case, the security becomes a fallen angel and must leave the institutional portfolios constrained to investment grade (IG) securities. We record again a significant negative price reaction but larger than in the previous case and significantly higher when preceded by a widening of the credit spread in the corporate bonds market. Broadening the existing literature, we perform a third event study, focused on the subsequent bond deletion from an IG benchmark. In this case, our results show positive and significant excess returns after the month‐end index rebalancing, revealing a price reversal pattern of the fallen angel after its release from the index. This price rebound is the higher, whereas the stronger was the bond price pressure at the downgrade announcement. These insights offer some practical guideline for those professionals that manage IG and high‐yield portfolios. Copyright © 2014 John Wiley & Sons, Ltd.
    May 09, 2014   doi: 10.1002/ijfe.1496   open full text
  • Bank Dividends, Real Gdp Growth And Default Risk.
    Angelos Kanas.
    International Journal of Finance & Economics. May 09, 2014
    We reveal evidence that the US aggregate bank dividends exercise a causal impact on the US real GDP growth during the period from the introduction of the Prompt Corrective Action framework in 1992 until the outburst of the subprime mortgage market crisis in 2007. Over this period, the positive signalling effects of bank dividends outperform the negative effect of dividends on default risk. During the pre‐Prompt Corrective Action and the recent post‐2007 periods, bank dividends do not affect GDP growth. This regime‐dependent relation is due to an asymmetric role of bank default risk. These findings are of interest to bank regulators in reassessing the role of bank dividends within Basel III and carry important policy implications as bank dividends constitute an important tool available to policy makers for strengthening real activity. Copyright © 2014 John Wiley & Sons, Ltd.
    May 09, 2014   doi: 10.1002/ijfe.1491   open full text
  • Nonlinear Interdependence Between The Us And Emerging Markets' Industrial Stock Sectors.
    Taufiq Choudhry, Bashir Nur Osoble.
    International Journal of Finance & Economics. April 04, 2014
    This paper investigates the time‐varying, long‐run and short‐run dynamic relationships between stock industrial sectors of the US and three leading emerging markets/countries: Brazil, Malaysia, and South Africa between January 2000 and December 2009. A crucial empirical contribution of the study is the application of the nonlinear econometric time series techniques for the evaluation of the long‐run global relationships and causality linkages. Further contribution is the application of industrial sector indices rather than national indices. The results of the time‐varying analysis reaffirm the view that relationships between global financial markets tend to be quite volatile over time and particularly high in a time of high financial turbulence. Overall, the relatively weak interdependence between the US and the emerging markets' industry sectors suggests potential diversification benefits for investors in diversifying their portfolio investment across industrial sectors of emerging markets. Copyright © 2014 John Wiley & Sons, Ltd.
    April 04, 2014   doi: 10.1002/ijfe.1494   open full text
  • Cross‐Border Banking, Externalities And Sovereign Distress: Does The Euro Need A Common Banking Authority?
    Aitor Erce.
    International Journal of Finance & Economics. April 04, 2014
    This paper analyses the role of linkages between cross‐border banks and sovereigns in the spread of crises. After discussing evidence from past crises, I focus on the Euro Area. Banks from the Euro‐core played a key role in shedding the seeds for the transition from the US mortgage crisis to the Euro Area crisis. While national authorities supported their damaged banks, the Euro‐system's infrastructure allowed Euro‐core banks to undo intra‐area exposures with minor disruptions. Although this helped stabilize peripheral asset markets, the extent to which public funding replaced private one implied less macroeconomic correction and the current fiscal woes. The combination of cross‐border banking and national resolution schemes creates an externality on sovereigns, who are forced to contain the effects stemming from the balance sheet management of cross‐border banks. Weak public finances can easily push a banking crisis into a fiscal one. This negative externality is reinforced by Central Banks' mandate that limits fiscal cooperation. In the context of the Euro Area, to limit this problem, the Union should equip itself with a common bank resolution authority, which delinks banks and sovereigns. In addition, to limit the externality, macro‐prudential policy could set contributions for cross‐border operators in order to pre‐fund future bank rescues. Copyright © 2014 John Wiley & Sons, Ltd.
    April 04, 2014   doi: 10.1002/ijfe.1475   open full text
  • Long‐Run Determinants Of The Brazilian Real: A Closer Look At Commodities.
    Emanuel Kohlscheen.
    International Journal of Finance & Economics. March 14, 2014
    We use cointegration analysis to show that the long‐run behaviour of the Brazilian Real effective exchange rate between January 1999 and September 2012 can largely be explained by the price variation of a basket of five commodities—that accounted for 51% of Brazilian export revenues in 2011. We estimate that a 10% variation in the real price of these five commodities moves the fundamental long‐run real exchange rate by almost 5%. Changes in interest rate differentials do not explain short or long term movements in the exchange rate during this period. Furthermore, we find that deviations of the real effective exchange rate from the long run equilibrium level have an estimated half‐life of approximately 8 months. The growing exports of oil and fuel and of iron ores, as well as the important oil discoveries in the pre‐salt layer, suggest that commodity prices will continue to influence the value of the Real in the future. Copyright © 2014 John Wiley & Sons, Ltd.
    March 14, 2014   doi: 10.1002/ijfe.1493   open full text
  • Dislocations In The Won‐Dollar Swap Markets During The Crisis Of 2007–2009.
    Naohiko Baba, Ilhyock Shim.
    International Journal of Finance & Economics. March 14, 2014
    We analyse dislocations in the foreign exchange swap and cross‐currency swap markets between Korean won and US dollar from 2007 to 2009. A regime‐switching analysis of deviations from covered interest parity (CIP) identifies a crisis period starting in June 2007. Using an EGARCH model, we find that volatility index and the credit default swap spreads of Korean and US banks are the main factors explaining CIP deviations. We show that the Bank of Korea's US dollar loans of the proceeds of swaps with the US Federal Reserve were effective in reducing CIP deviations, whereas the provision of funds using its foreign reserves was not. Copyright © 2014 John Wiley & Sons, Ltd.
    March 14, 2014   doi: 10.1002/ijfe.1492   open full text
  • Estimating Liquidity Risk Using The Exposure‐Based Cash‐Flow‐At‐Risk Approach: An Application To The Uk Banking Sector.
    Meilan Yan, Maximilian J. B. Hall, Paul Turner.
    International Journal of Finance & Economics. March 14, 2014
    This paper uses a relatively new quantitative model for estimating UK banks' liquidity risk. The model is called the exposure‐based cash‐flow‐at‐risk (CFaR) model, which not only measures a bank's liquidity risk tolerance but also helps to improve liquidity risk management through the provision of additional risk exposure information. Using data for the period 1997–2010, we provide evidence that there is variable funding pressure across the UK banking industry, which is forecasted to be slightly illiquid with a small amount of expected cash outflow (i.e. £0.06 billion) in 2011. In our sample of the six biggest UK banks, only the HSBC maintains positive CFaR with 95% confidence, which means that there is only a 5% chance that HSBC's cash flow will drop below £0.67 billion by the end of 2011. RBS is expected to face the largest liquidity risk with a 5% chance that the bank will face a cash outflow that year in excess of £40.29 billion. Our estimates also suggest Lloyds TSB's cash flow is the most volatile of the six biggest UK banks, because it has the biggest deviation between its downside cash flow (i.e. CFaR) and expected cash flow. Copyright © 2014 John Wiley & Sons, Ltd.
    March 14, 2014   doi: 10.1002/ijfe.1495   open full text
  • Order Flows, Fundamentals And Exchange Rates.
    Kentaro Iwatsubo, Ian W. Marsh.
    International Journal of Finance & Economics. March 04, 2014
    We examine the links between end‐user order flows as seen by a major European commercial bank and macroeconomic fundamentals. We show that both exchange rate changes and flows are only weakly related to macroeconomic news announcements and hypothesize that ‘the cat is already out of the bag’ by the time the news is announced. Instead, order flows of financial and corporate customers reflect in real time the evolution of macroeconomies. The actions of the banks receiving the order flows in turn reveal the information to the market as a whole, which prices the exchange rate accordingly. By the time the news is announced, the exchange rate already contains the majority of the information. Copyright © 2014 John Wiley & Sons, Ltd.
    March 04, 2014   doi: 10.1002/ijfe.1490   open full text
  • Is Correlation Puzzle Really Puzzling? Reassessing Motives Of Foreign Asset Holdings By Us Investors.
    Kenta Inoue.
    International Journal of Finance & Economics. December 28, 2013
    This paper addresses a correlation puzzle in the financial gravity literature by taking into account a return‐chasing motive previously under‐researched as determinants of cross‐border asset holdings. I estimate a financial gravity equation to explain US investors' behaviour and confirm that even with the return chasing motive, the correlation puzzle remains unsolved. Furthermore, the data give a limited support for the return‐chasing motive. I find that USA's foreign asset holdings cannot be well explained by the correlation structure and excess returns. Copyright © 2013 John Wiley & Sons, Ltd.
    December 28, 2013   doi: 10.1002/ijfe.1476   open full text
  • A Single Composite Financial Stress Indicator And Its Real Impact In The Euro Area.
    Mevlud Islami, Jeong‐Ryeol Kurz‐Kim.
    International Journal of Finance & Economics. December 28, 2013
    In this paper, we construct a single composite financial stress indicator (FSI), which aims to predict developments in the real economy in the euro area. Our FSI was shown to perform better than the Euro STOXX 50 volatility index for the recent banking crisis and the euro‐area sovereign debt crisis and to be able to serve as an early warning indicator for negative impacts of financial stress on the real economy. Copyright © 2013 John Wiley & Sons, Ltd.
    December 28, 2013   doi: 10.1002/ijfe.1483   open full text
  • Fixing The Phillips Curve: The Case Of Downward Nominal Wage Rigidity In The Us.
    Stefan Reitz, Ulf D. Slopek.
    International Journal of Finance & Economics. October 11, 2013
    Whereas microeconomic studies point to pronounced downward rigidity of nominal wages in the US economy, the standard Phillips curve neglects such a feature. Using a stochastic frontier model, we find macroeconomic evidence of a strictly nonnegative error in an otherwise standard Phillips curve in post‐war data on the US nonfinancial corporate sector. This error depends on growth in the profit ratio, output, and trend productivity, which should all determine the flexibility of wage adjustments. As the error usually surges during an economic downturn, the empirical model suggests that the downward pressure on inflation arising from higher unemployment in a standard Phillips curve framework is significantly cushioned. This might help to understand the robustness of inflation especially in the most recent past. In general, the cyclical dynamics of inflation appear to be more complex than captured by a conventional Phillips curve. Copyright © 2013 John Wiley & Sons, Ltd.
    October 11, 2013   doi: 10.1002/ijfe.1472   open full text
  • Exchange Rate Misalignment Estimates—Sources Of Differences.
    Yin‐Wong Cheung, Eiji Fujii.
    International Journal of Finance & Economics. October 11, 2013
    We study the differences in currency misalignment estimates obtained from datasets derived from two different International Comparison Programme (ICP) surveys. A decomposition exercise reveals that year 2005 misalignment estimates are substantially affected by the ICP price revision. Furthermore, we find that differences in misalignment estimates are systematically affected by a country's participation status in the ICP survey and its data quality—a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The findings are robust to the use of alternative datasets and specifications. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the Brazil, Russia, India and China economies, are highly variable. Copyright © 2013 John Wiley & Sons, Ltd.
    October 11, 2013   doi: 10.1002/ijfe.1474   open full text
  • The Impact Of The Euro Crisis On The Financial Performance Of European And North American Firms.
    Greg Filbeck, Kenneth Louie, Xin Zhao.
    International Journal of Finance & Economics. October 11, 2013
    In this paper, we investigate the impact of the changes in European percentage sales before and after the Euro crisis for both US‐based and European‐based companies, both overall and across industries. We find that larger firms are associated with a decrease in return on assets (ROAs) in the post‐crisis era; the largtest of these large firms are associated with an increase in ROAs after the crisis. In addition, European (North American) headquartered companies experience a statistically significant decrease (increase) in European sales after controlling for the additional control variables such as industry. Overall, we note that companies which have lower European sales and strategically move their sales out of Europe after crisis experienced an increase in ROA. This result is robust after controlling for endogeneity issues. Copyright © 2013 John Wiley & Sons, Ltd.
    October 11, 2013   doi: 10.1002/ijfe.1473   open full text
  • The Relevance Of Accuracy For The Impact Of Macroeconomic News On Exchange Rate Volatility.
    HelinÄ LaakkOnen, Markku Lanne.
    International Journal of Finance & Economics. February 22, 2013
    We study whether the accuracy of news announcements matters for the impact of news on exchange rate volatility. We use high‐frequency EUR/USD returns and releases of 20 US macroeconomic indicators and measure the precision of news in three different ways. When the precision is defined by the size of the first revision of the previous month's figure, we find that precise news increases volatility significantly more than imprecise news. Also, news on indicators that are in general more precise increase volatility more than news on typically imprecise indicators. Finally, we use real‐time data to measure the ‘true’ precision of news and find that the size of the first revision of the previous month's figure is a reasonable signal of ‘true’ precision. Copyright © 2013 John Wiley & Sons, Ltd.
    February 22, 2013   doi: 10.1002/ijfe.1467   open full text
  • A Global Model Of International Yield Curves: No‐Arbitrage Term Structure Approach.
    Iryna Kaminska, Andrew Meldrum, James Smith.
    International Journal of Finance & Economics. February 22, 2013
    This paper extends a popular no‐arbitrage affine term structure model to jointly model bond markets and exchange rates across the UK, USA and euro area. Using a monthly data set of forward rates from 1992, we first demonstrate that two global factors account for a significant proportion in the variation of bond yields across countries. We also show that, for an explanation of country‐specific movements in yield curves, local factors are required. Although we implement a very general factor structure, we find that our global factors are related to global inflation and global economic activity, whereas local factors are closely linked to monetary policy rates. In this respect, our results are similar to previous work. But an important advantage of our joint international model is that we are able to decompose interest rates into risk‐free rates and risk premia. Additionally, we are able to study the implications for exchange rates. We show that whereas differences in risk‐free rates matter, to a large extent, changes in the exchange rate are determined by time‐varying exchange rate risk premia. Copyright © 2013 John Wiley & Sons, Ltd.
    February 22, 2013   doi: 10.1002/ijfe.1468   open full text
  • Financial Integration And External Sustainability.
    Pascal Towbin.
    International Journal of Finance & Economics. December 07, 2012
    A stable net external position requires that the trade balance responds negatively to changes in the net external position. If financial integration makes financing external imbalances less costly, we expect slower external adjustment in more integrated economies. The study estimates theoretically founded trade balance reaction functions for a panel of 70 countries from 1970–2008. The empirical analysis finds that adjustment in integrated economies is slower. Consistent with the presented theory, the trade balance of integrated economies is more persistent, responds less strongly to net foreign assets and is more sensitive to fluctuations in net output. Under high integration, the response to the net external position is weak and close to the minimum required to ensure external sustainability. Copyright © 2012 John Wiley & Sons, Ltd.
    December 07, 2012   doi: 10.1002/ijfe.1469   open full text
  • A Case For Interest Rate Inertia In Monetary Policy.
    Mikael Bask.
    International Journal of Finance & Economics. November 26, 2012
    We argue that it is not necessary for the central bank to react to the exchange rate to have a desirable outcome in the economy. Indeed, when the Taylor rule includes contemporaneous data on the variables in the rule, the central bank can disregard from the exchange rate as long as there is enough with interest rate inertia in monetary policy. The reason is that interest rate inertia and a reaction to the current nominal exchange rate change are perfect substitutes in monetary policy. Hence, we give a rationale for the central bank to focus on the interest rate change rather than the interest rate level to have a desirable outcome in the economy, which we define as a determinate rational expectation equilibrium that is stable under least squares learning. Copyright © 2012 John Wiley & Sons, Ltd.
    November 26, 2012   doi: 10.1002/ijfe.1470   open full text
  • The Balance Sheet Channel In A Small Open Economy In A Monetary Union.
    João Sousa, Isabel Marques Gameiro.
    International Journal of Finance & Economics. September 19, 2012
    This paper uses a two‐country VAR approach to study the transmission of monetary policy shocks in Portugal, focusing in particular on the financial decisions of households, corporations (financial/non‐financial), the government and the rest of the world. We find that a monetary policy shock has a contractionary effect on economic activity and increases the financing needs of households and non‐financial corporations. The financial sector plays an important role, supplying the necessary funds to these sectors and thus facilitating their adjustment to the shock. We do not find much evidence of a significant systematic behaviour of the government or the rest of the world in response to monetary policy shocks. Copyright © 2012 John Wiley & Sons, Ltd.
    September 19, 2012   doi: 10.1002/ijfe.1464   open full text
  • Financial System Sophistication And Unemployment In Industrial Countries.
    Horst Feldmann.
    International Journal of Finance & Economics. July 10, 2012
    By using data on 21 industrial countries from 1984 to 2006 and a large number of controls, this paper studies the unemployment effects of one major characteristic of the financial system: its level of sophistication, that is, the variety of financial institutions and instruments available to the economy. The paper finds that a higher level of sophistication is likely to reduce unemployment among the total labour force as well as among high‐skilled workers. The magnitude of both effects appears to be modest. By contrast, financial system sophistication does not appear to affect unemployment among low‐skilled workers. Copyright © 2012 John Wiley & Sons, Ltd.
    July 10, 2012   doi: 10.1002/ijfe.1466   open full text
  • Exchange Rate Reversion Under Regimes Other Than Free Float.
    Luke Lin, Wenyuan Lin.
    International Journal of Finance & Economics. May 11, 2012
    Several studies indirectly point out that the exchange rate system may be one of the factors for establishing purchasing power parity (PPP). However, current researches on PPP have mainly focused on the recent floating period and need various statistical models to carry out. We use quantile autoregression technique to comprehensively examine the mean reversion properties of the New Taiwan Dollar (NTD), where the NTD was both in a fixed regime period and a managed floating system period. Empirical findings indicate that NTD showed comparatively faster recovery when subjected to a larger or positive disturbance from the market. Additionally, when NTD was in a fixed regime period, PPP was mostly established. But during the managed floating system period, it was only partially established. These results suggest that mean reversion of real exchange rate heavily depends on the regime effect. Copyright © 2012 John Wiley & Sons, Ltd.
    May 11, 2012   doi: 10.1002/ijfe.1465   open full text
  • Financial Markets And International Risk Sharing In Emerging Market Economies.
    Martin Schmitz.
    International Journal of Finance & Economics. May 11, 2012
    In light of rapidly increasing foreign equity liability positions of emerging market economies, we test for a necessary condition of international risk sharing, namely for systematic patterns between idiosyncratic output fluctuations and financial market developments. Panel analysis of 22 emerging market economies shows strong evidence for pro‐cyclicality of capital gains on domestic stock markets both over short‐term and medium‐term horizons. This implies that domestic output fluctuations can be hedged through cross‐border ownership of financial markets. Copyright © 2012 John Wiley & Sons, Ltd.
    May 11, 2012   doi: 10.1002/ijfe.1463   open full text
  • How Reliable Are De Facto Exchange Rate Regime Classifications?
    Barry Eichengreen, Raul Razo‐Garcia.
    International Journal of Finance & Economics. April 10, 2012
    We analyze disagreements over de facto exchange‐rate‐regime classifications using three popular de facto regime data series. While there is a moderate degree of concurrence across classifications, disagreements are not uncommon, and they are not random. They are most prevalent in middle‐income countries (emerging markets) and low‐income (developing) countries as opposed to advanced economies. They are most prevalent for countries with well‐developed financial markets, low reserves and open capital accounts. This suggests caution when attempting to relate the exchange rate regime to financial development, the openness of the financial account, and reserve management and accumulation decisions. Copyright © 2012 John Wiley & Sons, Ltd.
    April 10, 2012   doi: 10.1002/ijfe.1456   open full text
  • Overcrowding Versus Liquidity In The Euro Sovereign Bond Markets.
    Andrea Coppola, Alessandro Girardi, Gustavo Piga.
    International Journal of Finance & Economics. April 10, 2012
    With the adoption of a common currency, the degree of substitution between financial instruments supplied by EMU Member States to finance their national debts has risen. Providing the market for euro‐denominated government securities with a large volume of similar financial instruments is likely to increase liquidity and lower yields. By contrast, providing an excessive volume of the same instrument might increase the return demanded by investors. This paper aims at empirically assessing the balance between liquidity and overcrowding effects by EMU countries' issuance plans. Our results document a significant relationship between bunching in issues and bond yields. Copyright © 2012 John Wiley & Sons, Ltd.
    April 10, 2012   doi: 10.1002/ijfe.1454   open full text
  • Do Credit Rating Agencies Add Value? Evidence From The Sovereign Rating Business.
    Eduardo Cavallo, Andrew Powell, Roberto Rigobon.
    International Journal of Finance & Economics. March 21, 2012
    The debt crisis in several European Union nations has resulted in a set of downgrades in sovereign ratings, sparking a lively debate whether these opinions actually matter. Ratings and bond spreads may both be considered as noisy signals of fundamentals. Ratings only add value if, controlling for spreads and observable country fundamentals, they help explain other market variables. We employed a unique dataset of over 75 000 daily observations on emerging countries around rating actions by the three major agencies. We found that ratings do indeed add information, and this finding is robust to a variety of different tests. Copyright © 2012 John Wiley & Sons, Ltd.
    March 21, 2012   doi: 10.1002/ijfe.1461   open full text
  • Spillovers Between Business Confidence And Stock Returns In Greece, Italy, Portugal, And Spain.
    Erdal Atukeren, Turhan Korkmaz, Emrah İ Çevik.
    International Journal of Finance & Economics. March 14, 2012
    This paper employs Hong's (2001) causality‐in‐mean and causality‐in‐variance tests to investigate the spillovers between business confidence and stock returns for the four economically distressed Southern European countries, namely Greece, Italy, Spain, and Portugal. The sample uses monthly data and covers the period from January 1988 to December 2010. Our causality‐in‐mean results indicate that there is feedback relationship between stock returns and business confidence in Portugal. The direction of causality‐in‐mean runs from business confidence to stock returns in Italy, but it is in the reverse direction in the case of Spain. Nevertheless, there is still evidence of a contemporaneous interaction between business confidence and stock returns in both Italy and Spain. On the other hand, causality‐in‐variance indicate the presence of volatility spillovers from business confidence to stock returns in Portugal, while a causal relationship is found in the current month in the case of Italy. Business confidence causes stock returns only in the mean in Greece. These results indicate that the stock market and business confidence relationship has its own idiosyncratic properties and that the stock market reactions to the current macroeconomic environment and expectations about the future developments might evolve differently in each country. Copyright © 2012 John Wiley & Sons, Ltd.
    March 14, 2012   doi: 10.1002/ijfe.1453   open full text
  • European Central Bank Policy‐Making And The Financial Crisis.
    Janko Gorter, Fauve Stolwijk, Jan Jacobs, Jakob Haan.
    International Journal of Finance & Economics. March 07, 2012
    We estimated Taylor rule models for the euro area using Consensus Economics forecasts of inflation and output growth for the period 1998.6–2010.8. We first examined whether the recent financial crisis has affected European Central Bank (ECB) policies. Our results indicate that the ECB puts stronger emphasis on maintaining price stability than the earlier point estimates suggested. Next, we analysed whether economic developments in individual euro area countries affect ECB decisions. Despite the diverging economic developments in the countries in the euro area, notably during the recent financial crisis, we did not find support for the view that policy decisions have been influenced by regional developments. Copyright © 2012 John Wiley & Sons, Ltd.
    March 07, 2012   doi: 10.1002/ijfe.1452   open full text